Thursday, March 7, 2013

Other People’s Money: How Crowdfunding Lowers the Cost of Solar Energy

In fact, about 75% of residential solar photovoltaic projects and 40% of commercial ones
are financed with different “third-party ownership” models where
electricity users install a solar system with little to no money down
and start saving money from day one.
But the capital used to deploy these third-party-owned solar projects
has an effective interest rate that looks more like that of a credit
card than a mortgage. This translates into high monthly payments for
electricity from solar systems—just like a homeowner making steep
payments on a credit card in the home purchase example. Although it’s
not the only factor at play, high interest rates (closely related to
“costs of capital”) are one of the big reasons we only see lots of solar
in places like Hawaii (where residents pay the highest electricity rates in the nation),
but not Kentucky: Solar developers can only produce savings for
customers in areas with a combination of high electricity rates, good
sunlight, and attractive local incentives—think California and Arizona,
two leading states nationwide for total installed solar capacity.
For folks interested in deploying as much solar in the U.S. as
quickly as possible, this is a problem. Right now, the capital structure
behind most solar projects in the U.S. is prohibitively expensive for
the economics of solar to pencil out in most of the country. So, we’ve
got to help make capital for solar projects look more like home mortgage
loans than credit card debt.
There are a number of ways to do this, but many of the most popular solutions, such as master limited partnerships and solar-specific real estate investment trusts,
require regulatory and/or federal legislative changes and aren’t likely
to become large-scale solutions in the near term. However, there’s one
solution that’s already upon us—crowdfunding.

Crowdfunding lowers costs

As shown in the animation, the “credit card-like” capital that’s
currently used for solar projects is composed of expensive equity from
two sources: tax equity investors (companies able to absorb the tax
benefits associated with solar projects) and solar developers. This
equity is expensive and, in simple terms, has an effective interest rate
of over 15%. This translates into high a high cost of electricity from
solar systems.
But this is where groups such as Mosaic step in. Expensive tax equity
is still used to pay for about half of a project, but instead of using
equity from the solar developer, crowdfunding providers can step in with
funds from the crowd. Capital raised from the crowd has a much lower
interest rate (~6.5%) than equity put in from a solar developer (~15%),
so the combined interest rate for the solar project goes down, along with the cost of electricity from the solar system.
Finally, at some point in the future we could imagine crowdfunding
companies providing all of the capital for a solar project. This would
mean a very low interest rate on the entire project and a very low cost
of electricity from the solar system.
There are a number of different solutions in development that will
help lower interest rates associated with solar PV financing. But
crowdfunding excites me for one main reason: it’s here now. And
if we’re to get on pace to realize RMI’s vision of a secure,
low-carbon, and affordable U.S. electricity system by 2050 as outlined
in Reinventing Fire, we need solutions that drive deployment of existing technology as soon as possible.This blog post originally appeared on Greenbiz.